Internet Mini Case #10 Intel Corporation J. David Hunger In 1968, Robert N. Noyce, the co-inventor of the integrated circuit, and Gordon E. Moore left Fairchild Semiconductor International to form a new company. They took with them a young chemical engineer, Andrew Grove, and called the new firm Intel, short for integrated electronics. The company successfully made money by manufacturing computer memory modules. The company produced the first microprocessor (also called a “chip”) in 1971. A key turning point for the new company was IBM’s decision in the early 1980s to select Intel’s processors to run IBM’s new line of personal computers.
Today, more than 80% of the world’s PCs run on Intel microprocessors. One of the company’s early innovations was centralizing its manufacturing in giant chip fabrication plants. This allowed Intel to make chips at a lower cost than its competitors who made custom chips in small factories. The founders encouraged a corporate culture of “disagree and commit” in which engineers were encouraged to constantly think of new ways of doing things faster, cheaper, and more reliably. Massive investment by Japanese competitors in the late 1970s led to falling prices in computer memory modules.
Faced with possible bankruptcy, CEO Moore, with Grove as his second in command (Noyce had retired from active management), made the strategic decision in 1985 to abandon the computer memory business to focus on microprocessors. Projected growth in microprocessors was based on Moore’s prediction that the number of transistors on a chip would double every 24 months. In what was soon called “Moore’s Law,” Gordon Moore argued that microprocessor technology would improve exponentially, regardless of the state of the economy, the industry, or any one company.
Thus, a company had to be at the cusp of innovation or risk falling behind. According to Moore, “If you lag behind your competition by a generation, you don’t just fall behind in chip performance, you get undercut in cost. ” ______________________________________________________________________________ This case was prepared by Professor J. David Hunger, Iowa State University and St. John’s University. Copyright © 2006 by J. David Hunger. The copyright holder is solely responsible for case content.
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Sources available upon request. Reprinted by permission. To raise money, Intel’s management agreed to sell 12% of the company’s stock to IBM for $250 million, a stake it later repurchased. Moore’s Law soon became part of the corporate culture as a fundamental expectation of all employees. Andy Grove replaced Gordon Moore as Intel’s CEO in 1987. Moore continued to serve on Intel’s board of directors until 2001. During Grove’s tenure as CEO from 1987 to 1998, Intel’s stock price rose 31. 6% annually and revenues grew from $1. 9 billion to $25. 1 billion.
With 55% of its sales coming from outside the United States, Intel was transformed into a global corporation. The company became central to the growth of personal computers, cell phones, genomic research, and computer-aided design. Strategic Decisions Lead to Market Dominance IN ORDER TO SUCCEED IN THIS HIGH-TECH BUSINESS, MANAGEMENT WAS FORCED TO MAKE A NUMBER OF RISKY STRATEGIC DECISIONS. FOR EXAMPLE, INTEL’S BOARD OF DIRECTORS FOUND IT DIFFICULT TO VOTE FOR A PROPOSAL IN THE EARLY 1990S TO COMMIT $5 BILLION TO MAKING THE PENTIUM MICROPROCESSOR CHIP—FIVE TIMES THE AMOUNT NEEDED FOR ITS PREVIOUS CHIP.
IN LOOKING BACK ON THAT BOARD MEETING, THEN-CEO ANDY GROVE REMARKED, “I REMEMBER PEOPLE’S EYES LOOKING AT THAT CHART AND GETTING BIG. I WASN’T EVEN SURE I BELIEVED THOSE NUMBERS AT THE TIME. ” THE PROPOSAL COMMITTED THE COMPANY TO BUILDING NEW FACTORIES—SOMETHING INTEL HAD BEEN RELUCTANT TO DO. A WRONG DECISION WOULD MEAN THAT THE COMPANY WOULD END UP WITH A KILLING AMOUNT OF OVERCAPACITY. BASED ON GROVE’S PRESENTATION, THE BOARD DECIDED TO TAKE THE GAMBLE. INTEL’S RESULTING MANUFACTURING EXPANSION EVENTUALLY COST $10 BILLION, BUT RESULTED IN INTEL’S DOMINATION OF THE MICROPROCESSOR BUSINESS AND HUGE CASH PROFITS.
In 1994, soon after the introduction of the Pentium microprocessor, users noticed a small defect in the chip and began demanding replacement chips. The company soon fixed the problem and quickly sent their computer-maker customers new Pentium chips to replace the defective ones. Even though Intel had no obligation to deal directly with end users, the people to whom the computer makers sold their PCs, Grove and the board decided to replace all defective Pentium chips wherever they might be. This was an expensive decision, but one for which the firm received high praise throughout the industry.
Realizing that future development of microprocessors would involve RISC technology—a technology Intel did not then have—CEO Grove persuaded Hewlett-Packard’s CEO in 1994 to combine HP’s work in RISC technology with Intel’s ability in product development. This joint venture took on the multibillion-dollar expense of creating 64-bit chip architecture—thought to be crucial to Intel’s continued success. Along with Bill Gates at Microsoft and Steve Jobs at Apple, Andy Grove had become a major figure in the computer industry at the dawn of the 21st century.
Although Grove retired as CEO in 1998, he continued to serve until 2005 as Intel’s Chairman of the Board. Like Noyce and Moore before him, Grove took on the mantle of corporate guru. His 1996 book, Only the Paranoid Survive, in which Grove described how companies should deal with new competitors that emerge suddenly and change the fundamental shape of the industry, was widely read. Even with no official title, Grove continued to serve the company as its “senior adviser. ” Intel After Andy Grove: A New Strategic Direction CRAIG BARRETT REPLACED ANDY GROVE AS INTEL’S CEO FROM 1998 TO 2005.
HE WAS ABLE TO PERSUADE THE BOARD IN 2002 TO INVEST $28 BILLION IN THE LATEST MANUFACTURING PLANTS AND TECHNOLOGIES DURING THE LONGEST DOWNTURN IN THE CHIP INDUSTRY’S HISTORY. THE BOARD HAD BEEN WORRIED THAT NEW PLANTS COULD BURDEN THE INTEL WITH OVERCAPACITY IF DEMAND FAILED TO MATERIALIZE. BY 2005, FIVE FACTORIES WERE ABLE TO MAKE 21? 2 TIMES MORE CHIPS THAN THE OLDER-GENERATION FABRICATION PLANTS—1. 25 MILLION CHIPS DAILY. BECAUSE OF THE HUGE COST TO BUILD THIS TYPE OF PLANT, RIVALS TI, AMD, AND IBM EACH HAD ONLY ONE PLANT OF THIS ADVANCED TYPE IN 2006.
TI CONCEDED THAT ITS CAPACITY TO PRODUCE THE LATEST-TECHNOLOGY CHIPS WAS LIMITED TO ONLY 250,000 PER DAY. During Barrett’s tenure, the company also invested billions of dollars in businesses outside the computer market that largely failed. In 2001, the firm exited from making cameras and other consumer electronics gear after key customers Dell and Hewlett-Packard (HP) complained that Intel was competing against them. In 2002, Intel took a $100 million charge against earnings when it cancelled its entry into Web hosting.
In 2004, Intel attempted to go after Texas Instruments with its version of digital signal processors, a key ingredient in cell phones. Unfortunately, cell-phone manufacturers ignored Intel’s product in favor of those by TI. Industry analysts concluded that Intel had a steep learning curve outside of personal computers. Even with this checkered history outside the PC business, in 2004 CEO Barrett launched an ambitious strategic move. Instead of “Intel Inside,” the plan was to be “Intel Everywhere. Under the new strategic plan, Intel would offer chips that would be used in all sorts of applications, including PCs, cell phones, flat-panel TVs, portable video players, wireless home networking, and medical diagnostic equipment. The company targeted 10 new product areas for its chips, primarily in the consumer electronics and communications markets. This plan was based on the movement in multiple industries from an analog to a digital format. According to Barrett, “Communication is going digital. Entertainment is going digital. We are able to bring our expertise into different areas where we really had no unique capability before. Supporting this announcement, Intel introduced a chip based on a new technology called WiMax that could be used to deliver high-speed wireless Internet access throughout a small city for about $100,000, one-tenth the cost of fiber-optic lines. Competition Heats Up MEANWHILE, INTEL’S PC CHIP BUSINESS WAS RUNNING INTO SOME DIFFICULTY. WHEN, IN 2004, INTEL AND HEWLETT-PACKARD RELEASED THE ITANIUM SERVER CHIP THEY HAD JOINTLY DEVELOPED THREE YEARS EARLIER, CRITICS CALLED IT “THE ITANIC. ” DELIVERED TWO YEARS LATE AT A COST OF $2 BILLION, THE 64-BIT CHIP PERFORMED MORE SLOWLY THAN INTEL’S OWN 32-BIT CHIP AND SEEMED TO HAVE NO FUTURE.
IN FEBRUARY 2004, CEO BARRETT ANNOUNCED THAT THE COMPANY WOULD RECONFIGURE ITS 32-BIT XEON CHIP FOR SERVERS AND ITS PENTIUM 4 FOR DESKTOPS SO THAT THEY COULD HANDLE 64-BIT APPLICATIONS. UNFORTUNATELY, ADVANCED MICRO DEVICES (AMD) HAD ALREADY BEGUN SELLING ITS OPTERON SERVER CHIP IN APRIL 2003. THE OPTERON HAD THE CAPABILITY OF RUNNING BOTH 32-BIT AND 64-BIT APPLICATIONS. SURPRISINGLY, INTEL’S JOINT VENTURE PARTNER HP DECIDED TO SELL SERVERS WITH AMD’S OPTERON CHIP ALONG WITH INTEL’S PRODUCTS. BY DECEMBER 2003, AMD HAD OBTAINED 3. 9% OF THE MAINSTREAM SERVER MARKET AND WAS TAKING AIM AT THE PC MARKET AS WELL.
Since 2003, AMD’s chips had been faster, used less power, generated less heat, and cost less than did Intel’s. As a result, Intel’s share of the market in servers fell from almost 100% in 2001 to less than 85% in 2006. Its market share in laptop PCs declined from 88% in 2001 to 86% in 2006. Its share in desktops also dropped from 80% in 2000 to 74% in 2006. Dell, the biggest PC maker in terms of sales, decided in May 2006 to abandon its policy of only using Intel chips in its PCs by offering AMD chips in its computer servers. This was a serious blow to Intel’s continued dominance of the market.
AMD was able to make a significant dent in Intel’s market share by focusing its limited resources on microprocessors for PCs and servers and letting others supply the remaining chips. When Intel ran into a parts shortage for its desktop PCs in December 2005, AMD quickly dispatched its sales people to fill the void. AMD-based desktop PCs began to dominate the shelves at Best Buy, Circuit City, and other stores. By mid-2006, AMD held a 26% share of the U. S. server chip market and a 48% share of the multi-core processors, which put at least two chips on a single piece of silicon.
As a result, AMD’s gross margin of 58. 6% exceeded Intel’s of 55. 1% during the first quarter of 2006. In response, Intel began offering the first in a family of revamped chips called Core 2. These chips used less energy while offering better performance. Intrigued by AMD’s success, industry analysts wondered if AMD would be able to continue offering innovative products without succumbing to the supply problems that had dogged it in the past. Reinventing the Company IN MAY 2005, CRAIG BARRETT TRANSFERRED THE CEO POSITION TO PAUL OTELLINI AND BECAME CHAIRMAN OF THE BOARD.
PAST-PRESIDENT OF INTEL UNDER BARRETT, OTELLINI CONTINUED BARRETT’S STRATEGIC DECISION TO PUSH THE COMPANY INTO MULTIPLE FIELDS WITH NEW CHIP “PLATFORMS. ” PC GROWTH WAS SLOWING. CELLULAR AND HANDHELD DEVICES WERE NOW COMPETING FOR THE PRIMARY SPOT IN PEOPLE’S LIVES. OTELLINI AGREED THAT HE MUST REINVENT INTEL OR FACE A FUTURE OF EVENTUAL DECLINE. THE PC BUSINESS APPEARED TO HAVE REACHED MATURITY. REVENUE GROWTH HAD AVERAGED 13% FROM 2002 TO 2005, BUT ANALYSTS WERE ESTIMATING THAT THE COMPANY’S SALES WOULD ONLY GROW 7% IN 2006 TO $42. BILLION. PROFITS, WHICH HAD BEEN INCREASING ON AVERAGE 40% ANNUALLY FROM 2002 TO 2005, WERE EXPECTED TO RISE ONLY 5% IN 2006 TO $9. 5 MILLION. Ortellini proposed that Intel should not just make PC microprocessors, but should also create many types of chips, as well as software, and then combine them into what he called “platforms. ” Since taking over as CEO, Ortellini had reorganized the company, created business units for each product area, and scattered the processor experts among the units. He added 20,000 people in 2005. Note: Intel’s annual and quarterly reports and SEC filings are available via the company’s web site at www. intel. com. ) Paul Ortellini was the first non-engineer to serve as Intel’s CEO. He put particular emphasis on marketing because he thought that the only way Intel could succeed in new markets was by communicating more clearly what technology could do for customers. This went contrary to the corporate culture in which engineers had been the key players who made ever-faster chips and then let marketers try to sell them.
Ortellini created development teams with people having a cross-section of skills. Chip engineers, software developers, marketers, and market specialists now worked together to develop breakthrough innovations. Many engineers were frustrated with the changes and their loss in status. Some of the design specialists who had been working on the Pentium 4 before it was cancelled left Intel for jobs at TI or AMD. Ortellini’s ultimate goal was to provide the manufacturers of everything from laptops and entertainment PCs to cell phones and hospital gear with complete packages of chips and software.
The old logo of “Intel Inside” was to disappear, replaced by an updated Intel logo with a swirl to signify movement and a tagline of “Leap Ahead. ” Meanwhile, the Pentium brand was to be slowly phased out and replaced by Viiv, Centrino, and Core. Intel was on a new path. It was leaving the Grove era behind and moving into uncharted territory. This was not the first time that the company had bet everything on a new strategy. Would Intel succeed with its new strategic direction?